Minimum Pricing ( Price Floors )

Question 1

What is a minimum price ( Price Floor ) ?

Answer 1

A fixed price by the GOVT set above market equilibrium

Question 2

Why are Price floors set ?

Answer 2

To protect consumers from price volatility

Solve Market failure

Question 3

Explain the impact of a subsidy on a diagram ?

Answer 3

Price increases from P1-P min
Q demanded falls Q1-QD
Q supplied increases Q1-QS

Question 4

How do we find the excess supply on the price floor diagram ?

Answer 4

The area QD and QS

Question 5

How do we find the cost of the intervention ( GOVT excess supply from intervention buying )

Answer 5

QDQSBC

Question 6

How do we find the Producer revenue with and without Intervention Buying ?

Answer 6

With IB- PminCQs0

Without IB -PminBQD0

Question 7

How do consumers react to the price floor ?

Answer 7

:( they pay more , consumer surplus is eroded , quantity of choice is reduced

Lower affordability for poor as it is regressive

Have to bare the cost of Intervention Buying via tax increases and cuts to GOVT spending

Question 8

How do producers react to the price floor ?

Answer 8

:) If there is intervention buying for the excess supply that it has created

Increased producer surplus if there is no IB then its hard to say

Question 9

How does the GOVT react to the price floor ?

Answer 9

:) if goals are reached - they have protected the industry

:( due to the regressive nature impact on consumers + :( about the excess supply they bought ( may result in dumping )

Question 10

What does a price floor create ?

Answer 10

Excess supply in the market as people have to pay more so they buy less due to the price